BP 2006 Annual Report Download - page 211

BP Annual Report and Accounts 2006 209
Notes on financial statements
1 Accounting policies
Accounting standards
These accounts are prepared in accordance with applicable UK accounting standards. In preparing the financial statements for the current year, the
company has adopted the amendments to Financial Reporting Standard No. 26 ‘Financial Instruments: Measurement’ (FRS 26). This has resulted in a
change of accounting policy for financial guarantee contracts given by the company in respect of its subsidiaries, associates and jointly controlled
entities. These contracts are recorded at fair value in the company’s financial statements. This change in accounting policy has resulted in a restatement
of 2005 comparative information: investments in subsidiaries were increased by $20 million; amounts due from group undertakings were increased by
$23 million; other creditors were increased by $43 million. The effect on the company’s profit for the year was not material.
Accounting convention
The accounts are prepared under the historical cost convention.
Foreign currency transactions
Foreign currency transactions are booked in the functional currency at the exchange rate ruling on the date of transaction. Foreign currency monetary
assets and liabilities are translated into the functional currency at rates of exchange ruling at the balance sheet date. Exchange differences are included
in profit for the year.
Investments
Investments in subsidiaries and associated undertakings are held at cost. The company assesses investments for impairment whenever events or
changes in circumstances indicate that the carrying value of an investment may not be recoverable. If any such indication of impairment exists, the
company makes an estimate of its recoverable amount. Where the carrying amount of an investment exceeds its recoverable amount, the investment
is considered impaired and is written down to its recoverable amount.
Share-based payments
Equity-settled transactions
The cost of equity-settled transactions with employees is measured by reference to the fair value at the date at which they are granted and is
recognized as an expense over the vesting period, which ends on the date on which the relevant employees become fully entitled to the award. Fair
value is determined by using an appropriate valuation model. In valuing equity-settled transactions, no account is taken of any vesting conditions, other
than conditions linked to the price of the shares of the company (market conditions).
No expense is recognized for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which are
treated as vesting irrespective of whether or not the market condition is satisfied, provided that all other performance conditions are satisfied.
At each balance sheet date before vesting, the cumulative expense is calculated, representing the extent to which the vesting period has expired and
management’s best estimate of the achievement or otherwise of non-market conditions and number of equity instruments that will ultimately vest or, in
the case of an instrument subject to a market condition, be treated as vesting as described above. The movement in cumulative expense since the
previous balance sheet date is recognized in the income statement, with a corresponding entry in equity.
Where the terms of an equity-settled award are modified or a new award is designated as replacing a cancelled or settled award, the cost based on
the original award terms continues to be recognized over the original vesting period. In addition, an expense is recognized over the remainder of the
new vesting period for the incremental fair value of any modification, based on the difference between the fair value of the original award and the fair
value of the modified award, both as measured on the date of the modification. No reduction is recognized if this difference is negative.
Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any cost not yet recognized in the income
statement for the award is expensed immediately. Any compensation paid up to the fair value of the award at the cancellation or settlement date is
deducted from equity, with any excess over fair value being treated as an expense in the income statement.
Cash-settled transactions
The cost of cash-settled transactions is measured at fair value using an appropriate option valuation model.
Fair value is established initially at the grant date and at each balance sheet date thereafter until the awards are settled. During the vesting period a
liability is recognized representing the product of the fair value of the award and the portion of the vesting period expired as at the balance sheet date.
From the end of the vesting period until settlement, the liability represents the full fair value of the award as at the balance sheet date. Changes in the
carrying amount for the liability are recognized in profit or loss for the period.
Pensions and other post-retirement benefits
For defined benefit pension and other post-retirement benefit plans, plan assets are measured at fair value and plan liabilities are measured on an
actuarial basis using the projected unit credit method and discounted at an interest rate equivalent to the current rate of return on a high-quality
corporate bond of equivalent currency and term to the plan liabilities. Full actuarial valuations are obtained at least every three years and are updated at
each balance sheet date. The resulting surplus or deficit, net of taxation thereon, is presented separately above the total for net assets on the face of
the balance sheet.
The service cost of providing pension and other post-retirement benefits to employees for the year is charged to the income statement. The cost of
making improvements to pension and other post-retirement benefits is recognized in the income statement immediately when the company becomes
committed to the change.
When a settlement (eliminating all obligations for benefits already accrued) or a curtailment (reducing future obligations as a result of a material
reduction in the scheme membership or a reduction in future entitlement) occurs, the obligation and related plan assets are remeasured using current
actuarial assumptions and the resultant gain or loss recognized in the income statement during the period in which the settlement or curtailment occurs.
A charge representing the unwinding of the discount on the plan liabilities during the year is included within other finance income.
A credit representing the expected return on the plan assets during the year is included within other finance income. This credit is based on an
assessment made at the beginning of the year of long-term market returns on plan assets, adjusted for the effect on the fair value of plan assets of
contributions received and benefits paid during the year.